The War on Inflation Is Lost

America is going to lose the war on inflation.

On purpose.

No one in power will tell you that. So, I will.

Here’s the problem at the core of today’s dispatch: The Federal Reserve and the Treasury Department need opposing strategies to work, and neither can get what it wants without wrecking the other.

That’s a tug of war. And the winner is going be… inflation. The government needs it. The Treasury can exploit it. And the Fed will tolerate it for the greater governmental good, though it means bad juju for you and me and anyone holding cash.

Let’s start with three numbers.

1. $40.2 trillion. The amount of debt America has accumulated.
2. $1.2 trillion. The amount of money Uncle Sam paid in interest on the debt in fiscal year 2026, which ended Sept. 30. That’s the second-largest line in the entire federal budget, trailing only Social Security.
3. 4.8% and/or 3.4%. Inflation in America today. In August, consumer prices jumped 0.4%. Keep that pace for a year and inflation runs at nearly 5%. Or on a year-over-year basis it’s 3.4%. Both are well above the Fed’s 2% target.

That trio explains what we will call the Fed-Treasury Dilemma.

If the Federal Reserve raises interest rates to fight inflation, which is the textbook response, it sets off a stink bomb inside the Treasury Department, where Treasury Secretary Scott Bessent has been purposefully borrowing more and more money at short-term rates, instead of locking in 30-year loans, because short-term loans are cheaper.

That makes sense… unless short-term rates go up… which is exactly what happens when the Fed raises interest rates.

So higher rates means the interest payments on America’s debt move well beyond $1.2 trillion. And it means Bessent’s strategy of going short with America’s debt exposes the country to constantly higher rates as all of Bessent’s short-term debt rolls over every month or three.

That’s a debt crisis.

Then again, if Bessent gets his way and rates stay low or come down, then inflation rages even more, and American families see their spending power shrink.

Rising inflation will exacerbate America’s affordability crisis and will push up the long-term rates that drive mortgages higher… which will push down housing prices and worsen sour consumer sentiment already hovering near historic lows.

So Washington is stuck.

Raise rates, which the Fed needs to do to adequately fight inflation, and the government’s interest bill explodes.

Don’t raise them (or lower them), which Treasury needs to manage America’s egregiously large collection of IOUs, and grocery bills ratchet higher on an already aggrieved consumer class weary of months of higher prices.

All of which means that inflation is not the Fed’s enemy.

It’s Washington’s exit plan.

Washington needs inflation to outpace Fed interest rates.

That allows the debt to shrink quietly because it allows Washington to pay back what it owes with cheaper dollars.

Think about it this way: You owe $25,000 on a fixed-rate car loan. Inflation’s running hot so your company gives you a 10% raise. You still owe $25,000. But now it’s a smaller share of what you earn, so it’s easier to pay off.

You, the borrower, win.

The lender loses, because the dollars you’re using to repay the debt buy less than the dollars the bank fronted you.

Now flip that analogy. Uncle Sam is the guy with the loan. And you, the person trying to save for tomorrow, are the lender. In the bigger world of Uncle Sam, inflation means the debt doesn’t hurt as much, but you, as the saver, are losing purchasing power all along the way.

Thing is, this isn’t some cockamamie thesis. America has history here.

After World War II, US debt was bigger than the entire economy.

But Washington didn’t pay it off.

Instead, the Treasury Department leaned on the Fed to pin interest rates low, and let inflation run hot. By the middle of 1947, consumer prices were up 17.6% from a year earlier, while long-term government bonds paid just 2.5%.

The math there means that you earned $250 on a $10,000 government bond… but you needed $11,760 to cover the cost of what your $10,000 used to buy. You collected your 250 bucks, but your wallet was $1,500 lighter because your overall costs went up.

You lose.

So, the Fed today doesn’t have to win the war on inflation.

It just has to look like it’s fighting.

That’s why it raised rates on September 16 by a meager 0.25 percentage points, and why it says another meager rate hike could come this year—with none likely in 2027.

But real inflation, the kind you feel in your wallet, is still likely to outrun whatever rate the Fed sets.

And everyone in DC is going to be perfectly fine with that.

The Fed and the Treasury are in a tug of war neither can win outright… so the best thing to do is pretend you’re tugging, and allow inflation to run hotter than interest rates.

Short-term rates stay at a level Bessent can live with, and the Fed can cosplay as inflation fighter.

All while your purchasing power is quietly draining away in the background.

When the binary choice is inflation or a debt crisis, which one do you think Washington chooses?

My bet, based on historical evidence: The Fed will talk loudly and carry a small stick. It will offer tough words on inflation, even while prices keep attacking every grocery aisle in America.

Because the second option—a debt crisis—is one that neither the dollar nor your savings recover from.